As we make our way through yet another slow year for home sales, multiple listing service (MLS) inventory is emerging as a key component in California’s housing market.

Inventory for sale is at its lowest in recent memory, averaging 16% below a year earlier as of December 2020, weighted across California’s largest metros, according to data from Zillow. The winter months typically see the lowest inventory of homes for sale, peaking around mid-year. In 2020, the mid-year peak in active listings was 21% below 2019’s peak.

2020’s inventory decline was steepest in Riverside, which had 39% fewer listings than a year earlier as of December 2020. On the other hand, San Francisco and San Jose both saw increases in inventory for sale compared to the prior year. Still, since these northern cities make up a comparatively small portion of California’s housing market, their higher inventory is an anomaly compared to the sea of declining inventory across most of the state.

Many would-be homebuyers and sellers are taking the wait and see approach to buying and selling, choosing caution during the ongoing recession and pandemic. However, the balance is tipped in the favor of sellers, as there are still more interested homebuyers – hoping to take advantage of historically low interest rates – than sellers. Thus, the for-sale inventory continues to decline as homes are snatched quickly off the market.

Chart update 02/16/21

Dec 2020 Dec 2019 Annual change
Los Angeles for sale inventory 19,400 20,600 -6%
Riverside for sale inventory 10,500 17,200 -39%
San Diego for sale inventory 5,200 6,700 -22%
San Francisco for sale inventory 6,300 4,800 +32%
Sacramento for sale inventory 4,200 5,700 -26%
San Jose for sale inventory 2,100 1,600 +31%

Here in California, homes typically leave the market more quickly than in more stable markets.

This is reflected in the average number of days a home sits on the market in California before being snatched up by eager buyers. In December 2019, the average number of days a home sat on the market before achieving a “pending” status was 32 days. Flash forward to December 2020 and the average home for sale in California’s largest metros was listed for just 14 days before pending, according to date from Zillow.

This supply-demand imbalance has pushed home prices higher in recent years, even in 2018-2019 when interest rates were still rising. Average California home prices were 10% higher in 2020 than the prior year. However, this price rise coincides with a 10% rise in buyer purchasing power due entirely to decreased mortgage interest rates. Expect prices to take a turn later in 2021, the result of the expiring foreclosure moratorium and the build-up of serious delinquencies. Home prices won’t recover until all jobs lost to the 2020 recession have been regained, not likely to occur until around 2023 at the soonest.

The cure for the inventory shortage

While supply and demand are momentarily disrupted during the ongoing 2020 recession, when the dust settles and economic progress returns (a recovery not likely to occur until 2023-2024), the inventory shortage will rear its head again. There are only two reasonable possibilities to cure California’s long-term inventory imbalance and general housing crisis:

  • decreased demand, via a reduction in the number of homebuyers; or
  • meeting current demand with more new construction.

The years beyond 2021 will see a bit of both.

2020-2021 is experiencing the triple whammy of a pandemic, recession and financial crash. Renters and homeowners alike are unable to make payments due to lost jobs and income. Government efforts to avoid mass evictions are keeping individuals housed, for now. But once the pandemic response subsides and the economy begins to find its footing, all of these missed payments will need to be repaid. The combined catch-up on housing payments will set back would-be homebuyers by years. Meanwhile, inventory will continue to swell as even homebuyers with sufficient income and ability wait on the sidelines for confidence in the economy to improve and prices to drop.

On the other hand, residential construction is due to increase, and soon.

Homeowner and rental vacancies are both near historic lows in California. Whenever vacancies decline, construction is sure to rise to meet demand. But construction has been hampered during this long recovery from the 2008 recession due to strict and limiting zoning laws in California’s metro areas. To that end, several pieces of new legislation have passed since 2017 focused on providing more inventory to combat the housing shortage. These legislative changes include paving the way for smoother permitting and looser zoning laws.

Related article:

Legislative steps toward more affordable housing